On a typical tax balance that has been sitting for a few years, a quarter or more of the total is penalties, and interest has been charged on the penalties too. Unlike the tax itself, penalties are often removable. The agencies have written rules for when they will remove them, and most taxpayers never ask.
Abatement is not forgiveness and it is not a negotiation over the tax. It is a request, made under those rules, that the penalty be cancelled because the taxpayer qualifies for a first-time waiver or had a reasonable cause for the failure. Interest on the penalty falls away with it.
This article follows a penalty abatement request in the order it progresses, with the IRS and with the Franchise Tax Board.
Which Penalties Can Be Removed
- Failure to file and failure to pay. The most common penalties and the most often removed, by first-time relief or reasonable cause.
- Failure to deposit. The payroll tax deposit penalty, removable on the same grounds.
- Accuracy-related penalties. The 20 percent penalty added after an audit. First-time relief does not apply, but reasonable cause and good faith do.
- Estimated tax penalties. Rarely removed, and only in narrow situations such as a casualty, a disability, or retirement after age 62.
- Interest. Generally not removable, except where it accrued because of an agency error or delay. Interest charged on a removed penalty, however, disappears with the penalty.
Identify the Penalty
Reading the account to see exactly what was charged, when, and why.
A notice shows a total. The account transcript shows each penalty separately, with the date it was assessed and the code that identifies it. We pull the transcripts for every year involved and list the penalties by type, because the grounds for removing a late-filing penalty differ from the grounds for an accuracy penalty, and each year is evaluated on its own.
The transcripts also show whether the penalty has already been paid. That matters for the next step, because a paid penalty is recovered through a refund claim, which has its own deadline: generally three years from the filing date or two years from the payment, whichever is later.
First-Time Relief
Using the waiver the agencies grant for a clean compliance history.
The IRS
The IRS removes failure-to-file, failure-to-pay, and failure-to-deposit penalties for a single period under its first-time abatement policy when:
- the taxpayer had no penalties in the three prior years;
- all required returns have been filed; and
- the tax has been paid or arranged to be paid.
No explanation of the failure is needed. It is granted on request, and it is the first thing we check on any account.
The FTB
California has a one-time penalty abatement for individuals, available for tax years beginning in 2022, covering the timeliness penalties. The conditions are similar:
- a clean history for the prior four years;
- all required returns filed; and
- the tax paid or on a payment plan.
It can be used once.
First-time relief covers one period. When several consecutive years carry penalties, it is the earliest year that qualifies, because each later year then has a penalty inside its three-year look-back. The remaining years are pursued on reasonable cause.
Reasonable Cause
Showing that the failure happened despite ordinary care.
What qualifies
Reasonable cause means that the taxpayer exercised ordinary business care and still could not comply. The recognized grounds include a death or serious illness in the immediate family, an unavoidable absence, a fire, flood, or other casualty, the inability to obtain necessary records, and reliance on incorrect written advice from the agency. Reliance on a tax professional helps for some penalties but, under a long-standing rule, does not excuse a late-filed return.
What does not
Not having the money, not knowing the deadline, and being busy are not reasonable cause. A request built on them is denied.
Documenting it
The explanation is a short, dated chronology tied to the specific period, with the proof attached: medical records, a death certificate, an insurance claim, correspondence showing the records were requested. We also show what the taxpayer did to comply once the obstacle passed, because the agencies look for that.
The Request
Choosing the route that fits the penalty and the agency.
The IRS
First-time relief is usually requested by phone and granted on the call. Reasonable cause is requested in writing, either in response to the penalty notice or on a claim form, with the chronology and the documents attached. If the penalty has already been paid, the same request is framed as a refund claim.
The FTB
The FTB has separate forms for its one-time abatement and for reasonable cause, and it generally wants the tax itself paid or on a plan before it will act. A denied reasonable cause request at the FTB is treated as a denied refund claim, which carries appeal rights.
Timing
A request can be made before or after payment, but a paid penalty must be claimed within the refund deadline. For a taxpayer who is also seeking a payment plan or an offer, we sequence the penalty request so that the balance being negotiated is the smaller, post-abatement figure.
Denial and Appeal
Taking a denied request to someone other than the person who denied it.
An IRS denial letter explains the appeal right. A written protest takes the request to the Independent Office of Appeals, which weighs the hazards of litigation and may reach a different result from the service center that issued the denial. If the penalty was paid and the refund claim is denied or ignored for six months, the dispute can be taken to court.
An FTB denial of a reasonable cause refund claim can be appealed to the Office of Tax Appeals within the time stated in the denial. The appeal is heard by an independent panel, in writing or at a hearing.
Not every denial is worth appealing. We weigh the penalty amount against the strength of the facts and tell you plainly when to stop.
IRS and FTB Compared
| Topic | IRS | Franchise Tax Board |
|---|---|---|
| First-time relief | Clean three-year history; failure to file, pay, and deposit penalties; one period per request. | One-time abatement for individuals, tax years 2022 and later; clean four-year history; timeliness penalties. |
| Reasonable cause | Recognized grounds, documented; reliance on a preparer does not excuse late filing. | Similar standard on the FTB’s own form; tax generally must be paid or on a plan first. |
| Interest | Removed only for agency error or delay. | Removed only in narrow circumstances. |
| Appeal | Independent Office of Appeals, then court on a paid penalty. | Office of Tax Appeals. |
What It Costs
A first-time abatement request is usually a small flat fee, often handled as part of a larger engagement. A reasonable cause request is quoted after we have read the account and heard the facts, because the work is in the documentation. Neither agency charges a fee for the request.
- The penalty notices and any denial letters
- Tax returns for the years involved, and the dates they were filed
- Records of what happened that year: medical, family, casualty, or business events
- Any correspondence with the agency or with a tax preparer about the late return or payment
Gregory Grigoryants is a California attorney (State Bar No. 286804) who has represented individuals, families, and business owners in bankruptcy, debt collection defense, and tax resolution matters for more than 13 years. He practices from offices in Sherman Oaks and Beverly Hills and speaks English and Russian.